Where are the markets headed? How could Trump’s agenda affect the financial markets? Check out my March 15th Market Update.
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Today is Wednesday, March 15th, and, actually, it’s been a little while since I’ve done one of these market updates, but, honestly, the markets have actually been pretty quiet here. In fact, according to MarketWatch, it’s been 105 days since the Dow Jones and the S&P 500 have had a 1% or greater pullback. Just to kind of put that in perspective with where the market is at right now, it’s approximately 210 points. So the markets have been pretty quiet. That’s been one of the things that has kept me from doing one of these market updates, because I didn’t really feel like I had a lot to talk about. Well, today I do.
We’ve got our new president, and we’re starting to see some of the legislation that he’s talking about implementing. This week, in fact, we’ve got The Republicans’ first rendition of a replacement for the Affordable Care Act, or Obamacare, so we’re going to talk about that a little bit. I’m going to talk a little bit about what Trump had set out to do in his campaign and where he stands right now for implementing some of those things. I also want to talk a little bit about what happened in the market last year, because I think that’s important to kind of reflect back and see where we came from, and then, of course, we’ll talk about some things that we can see here for the rest of 2017.
2016 was a really interesting year. If you remember, we started off 2016 with what I consider to be a pretty horrendous drop in the market. I think the markets dropped about 12 or 13% from the beginning of January through around February 11th. And then the markets kind of muddled along for most of the year, kind of regaining some of those losses that we had through 2016. Things started looking a little bit better after Labor Day, and then after the election, of course, we’ve had this, what they call a Trump rally, where the market is up pretty substantially here since the election. Last year was a challenging year for us with the way we managed portfolios.
As many of you know, we do some tactical asset allocating, in other words, we don’t stay fully invested all the time, we can make adjustments based on what we see happening in the market with momentum. So after the markets had that pretty big drop here in the first part of the year, we shifted some things over to a more conservative asset allocation, and quite honestly, that hurt us a little bit last year because where the markets moved forward, we missed out on some of those returns. As our models and our portfolios stand right now, we’re back to our full asset allocation, and, of course, we’re moving along with the markets pretty much like everybody else.
Obviously, we’re seeing a lot of stuff from Trump. The other thing I’m seeing quite a bit right now, too, on social media are some of these doom and gloom reports coming out, and this is something, I think, is a whole industry, different people writing books about the imminent stock market collapse, or the collapse of the entire US economy in some cases, and I think we need to be very careful about what we see there in reacting to some of that. In fact, actually, if we look at some of the valuations on stocks, we’re really pretty much in the averages. I was reading the JP Morgan Guide to the Markets report here this morning, and according to that report, we’re maybe just slightly overvalued on stock valuations compared to our historical averages. So, historically, we’re right around 15.9 on a price to earnings ratio. I think right now we’re about 16.9 for forward-looking earnings. So we’re just maybe a little bit overvalued on that.
What I want to do now is I want to spend a little bit of time talking about Trump and maybe why the market has reacted as positively as it has, and talk a little bit about where we see things going. So, first of all, the market has rallied quite a bit since the Trump election. Part of that rally I think is due to just the removal of the uncertainty. So one of the things the market hates more than anything is it hates not knowing, and we had a very heated, very contested presidential election, and the markets just really wanted to know who was going to be the president, and now I think that part of this rally is due just to the fact that we now kind of know what we’re getting.
Trump talked about a lot of things during his presidential campaign, and he’s still continuing to talk about a lot of those things. I think the biggest things right now that are driving this market are, number one, the tax reform, and according to some of the Washington insiders that I follow, in fact, I was just at a meeting here about a week and a half ago with Andy Friedman, who’s known as the Washington insider, and he along with a lot of other people feel fairly confident that Trump is going to be able to get some legislative tax reform put through, and what he’s pretty much talking about is across-the-board tax cuts for almost everybody, and when you cut somebody’s taxes, that’s going to drive economic growth. If you put another $1,000 in your pocket and another $1,000 in my pocket, chances are we’re probably going to go out and spend some portion of that, maybe all of that, and that’s going to drive the economy.
He’s also talking about some pretty big infrastructure spending. In fact, he’s actually thrown around a trillion dollars in infrastructure, and so that’s going to be an effort to repair the roads, and the bridges, all of the infrastructure for the country here, and when you combine maybe a lower tax rate along with that spending, that is going to, chances are, drive economic growth, and it’s going to drive stock market returns. But there are some budget hawks out there, some Republicans that aren’t going to like this very much, and I think there is going to be a little bit of a pushback on this, where they’re not going to let him cut taxes to the extent that he wants to cut them while, at the same time, spending that kind of money, that’s going to do huge things to the deficit and to the national debt, pushing that upwards. So I think they’re going to curtail a little bit of that.
When they do the tax reform, a couple things that have been tossed around, one of those is maybe limiting the deductions that we can take for itemized deductions and capping those, especially for the upper end of things. Income-wise, the wealthy, maybe limiting that at $200,000 a year. And anything is on the table as it comes to this. They might even do something to eliminate or reduce the interest rate deduction that we get for our home loans and things like that. There’s definitely some rumblings of that. Hopefully, that will be offset by the tax cuts that we get, but anything is on the table and there will be a little bit of pushback,
One of the biggest things that’s coming up, in fact, it’s actually coming up this Friday, March 17th, we’re actually going to hit the debt ceiling, in other words, we’ve hit the limit where The United States government can no longer go out and borrow any additional money unless they get congress to vote on it to increase that debt ceiling. This is nothing new. This has happened dozens of times probably over the last couple of decades. Every time, congress votes to raise that debt ceiling, but, usually, it ends up being a little bit of a negotiating tool that some people will use in congress to basically say, “Hey, we’re going to raise the debt ceiling, “but we’re only going to do it if we get this, this, and this.” And so I think we’ll see a little bit of that happening as it gets closer to that deadline. Congress has appropriated funds to get us through April 28th. So even though we’re going to hit the debt ceiling on Friday, St. Patrick’s Day, this week, we won’t actually run out of money as a government until April 28th. So that’s the real deadline, and there may be some pushbacks on that, and if we effectively don’t raise the debt ceiling by that date, then the government will shut down. We’ve had that happen a couple of times, where the government stops operating for a couple of days. I personally never view that as a bad thing, but it depends on how far they want to push it, but that could lead to a little bit of market volatility. And depending on how heated that debate gets, it may even effectively lead to a lot of market volatility. So that’s something that we’re going to kind of watch out for.
One of the other things that Trump talked quite a bit about during the campaign, and I think he continues to talk about, although it’s probably not one of his top things, but the wall, number one, and the border adjustment taxes that he wants to implement there. That’s something that, personally, I’m very concerned about. There’s other economists and other people that are very concerned about that as well. I would be a little bit fearful that we could start, effectively, a trade war, where we start taxing imports coming into this country, and it all sounds good as a sound bite, but what it effectively does is, if we’re going to, let’s take iPhones as an example, let’s say we start taxing iPhones coming in from China more, what that’s going to do, immediately, is it’s going to raise the cost of the iPhone that you go out and buy, and that’s going to happen with a lot of products. The clothing industry is a big one, where we get almost all of our clothes, really, from overseas, that’s going to make clothes potentially more expensive. But I don’t know that, necessarily, in my opinion, it’s going to do what Trump thinks it’s going to do, and that’s effectively add this value onto the bottom line of our country and put that into the coffers of the US government. I think it’s going to have more ripple effects. So, hopefully, he backs off a little bit on that.
The last thing I really want to talk about here is one of the campaign promises that Donald Trump made, which was to repeal and replace the Affordable Care Act. Having watched Andy Friedman give a presentation about a week and a half ago, again, he’s the Washington insider, he studies this stuff all the time, and, basically, according to Andy and some of the research that I’ve read as well, basically, we don’t think that a complete repeal of Obamacare, or the Affordable Care Act, is really going to be possible. To do that would require 60 votes in The Senate, which, of course, The Republicans don’t have. What we do think they’re going to be able to do in The Republicans’ opinion is maybe take a little bit of the sting out of the Affordable Care Act in a couple of different areas, and they can do this because they can pass taxing and spending legislation with only having 51 votes. So a couple of things they’re talking about doing is taking the penalty or the tax away for people that don’t have insurance. They’re probably going to play around with the subsidies that maybe lower income families are going to get. We’ve already seen a little bit of that coming out here this week. I’m not going to get too much into it because this is all probably pretty likely to change here in the future. They’re talking about repealing the 3.8% Medicare surtax that applies to individuals at the upper income limits. So we’re going to see a lot happening, and I’m sure this bill is going to go back and forth many times here before something comes to a resolution. Personally, on the Affordable Care Act, I am going to be looking for something that is going to make this healthcare environment more free, so we have more choices to choose the kind of health insurance that we want, that we think is best for our family, and choices with the doctors and what kind of coverage we get. So that’s what I’m looking for. I thought Rand Paul put together a pretty good option that included ability to save money in an HSA and also to basically use these plans and create competition across state lines is another example, and then give individuals the same ability to deduct their healthcare premiums that corporations get. So I think that would be a good step, in my opinion, in the right direction towards making this a little bit more free.
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